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The Financial Accelerator, Wages, and Optimal Monetary Policy

Discussion Papers 1860, 55 S.

Tobias König

2020. Revised Version, December 2023.

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I study the effects of labor market outcomes on firms' loan demand and credit intermediation. I first show in partial equilibrium that the presence of frictions in the banking sector lowers the capital factor demand elasticity to changes in real wages. This finding helps to connect the substitutability of labor and capital with credit conditions. Second, I use a new Keynesian banking model with an endogenous financial accelerator mechanism to study the role of lower capital factor demand elasticity on the transmission mechanism of monetary policy. Stabilizing nominal wages is close to the optimal monetary policy because it coincides with stabilizing the credit spread, the net worth gap, and the output gap. Inflation stabilization in turn imposes a policy tradeoff with high welfare costs.

JEL-Classification: E31;E44;E52;E58
Keywords: Financial accelerator, monetary policy, nominal rigidities, factor costs
Frei zugängliche Version: (econstor)